4.11.2010

Falling Levels of Distressed Debt

As I have noted in previous posts, the opportunity set for distressed debt has fallen immaculately over the past 12 months. Two charts from Bloomberg confirm this.


The first, is the number of distressed bonds traded. From Bloomberg: "This represents the number of distressed bonds traded during the previous day's market. Distressed is defined as any bond that trades at greater than 1000 basis points over the benchmark Treasury."

Here is the 1-year chart:


And the same chart since the index begins (1/17/2008):


The other index we can look at on Bloomberg is a similar chart, but instead this one tracks issuers, not issues. So for example, if one credit had 30 issues (read: Lehman Brother Holdings), the above charts would count each of those issues. From Bloomberg again: "This represents the number of issuers whose distressed bonds traded during the previous day's market. Distressed is defined as any bond that trades at greater than 1000 basis points over the benchmark treasury."

Here is the 1 year chart:


And the chart since the index began (same date as above):


Both these charts tell the same story: The opportunity set has gotten a lot weaker.

None of the four charts above pull in distressed bank debt. Empirically, from my seat on the desk, it is not as bad as the charts above indicate, but it is still horrible compared to late 2008, early 2009. What has contributed to this: Lots of capital chasing returns in the space combined with an improving economy. In bank debt land, you also have an issue of CLO's not wanting to sell any sub par exposure to realize overcollaterization hits and hence you have something I like to call: "An irrational holder."

All is not lost though, in the past week there has been some pretty major decisions in distressed debt land (one of the reasons for the lack of posts), which has provided some interesting opportunities for investors. We are going to explore these over the coming week and hopefully learn something from each of the decisions.

2 comments:

Andrew 4/13/2010  

There is so much debt right now banks, financial groups and in the U.S. right now, that it has no real meaning anymore.

Debt is a quadrillion dollar vortex, on a global level, that it's ever hard to project and put it on a chart. We're all just given the simple numbers but nothing ever drastic.

The bank debt will increase, especially when they're all out of options: a) they can't bailout more banks b) we're all out of money c) the only last resort is to print large sums of money.

I'm not sure where you stand on this but the stock market rally is just a mirage.

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I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.